Success will follow the medical device sales executive who is keenly attuned to cost issues

Recently, The Wall Street Journal reported a new subject making its way into the nation's medical school curriculum: cost containment. Nearly 80% of accredited U.S. medical schools now include the economics of treatment as part of a required course, with some even offering their students clerkships with HMOs to get front-line dollars-and-cents experience.

"If we don't prepare tomorrow's doctors to provide the cost-effective care that the public wants," commented one medical school dean, "they're going to have a very difficult time of it."

Cost issues dominate purchasing decisions

The next generation of physicians is now learning what health care vendors have known for some time. Indeed, the emergence of cost as a key factor in the therapeutic equation has resulted in a new set of pressures - and opportunities - for everyone. In the pharmaceutical industry, the pharmacy benefit manager profitably emerged to act as the broker between manufacturers and cost-conscious providers looking to lower their drug bill. The market share distribution in the medical devices industry, divided as it is between behemoths and niche players, doesn't lend itself to a pharmacy benefit manager model. Instead, today's medical device sales executive must fill the role internally, balancing the new expectations of clients with his or her company's goal of maximizing revenue and market share. To meet this challenge, medical device firms are relying on new criteria when looking to fill, or even to evaluate, their top sales positions. In particular, three qualities are emerging as essential: strategic communication, globalization and negotiation.

The first factor to be grappled with is a vendor's broad constituency. In ancient health care history - five years ago - Class III devices were clearly physician preference items. it was the exclusive prerogative of a hospital's chief cardiovascular surgeon, for example, to decide which heart valve to use. Today, while the chief cardiovascular surgeon retains the crucial final say, a chorus of other voices has chimed in to influence that purchase decision. A heart valve may represent only $4,000 of a $50,000 procedure, but no cost is immune to scrutiny by the chief purchasing officer, the department administrator, and even the hospital's CEO, CFO and COO. The successful sales executive must therefore be able to present his case not only in terms of clinical efficacy, but outcomes analysis and cost efficiency as well.

The consolidation wave that has gripped both pharmaceutical manufacturers and health care providers has also begun to tip the scales in the medical device marketplace. Providers are now anxious to deal with fewer suppliers in hopes of reducing costs through economies of scale. Thus, the edge will go to vendors that can present themselves as a one-stop shop. Today's providers want to contract for complete solutions. From a technology point of view, this means being able to offer a full array of products for a given indication.

Global market place: It's a small world after all

The new constraints in the U.S. health care market heighten the importance of the global marketplace and a company's ability to work within that framework. Indeed, while the U.S. represented two-thirds of the worldwide medical device market in the 1970s, it accounts for only 48% today and will shrink to about 40% by the end of the decade. Annual growth rates in overseas device markets are currently 40% higher than in this country, with Europe already considered by many the world's most attractive region. Increasingly, medical device producers are looking to fill senior sales slots with executives who have immediate experience with multiple foreign regulatory environments, marketplace drivers and a variety of therapeutic protocols. Going forward into the next century, the ability to work across international boundaries is no longer simply an advantage, but a necessity.

Whether in this country or abroad, however, account management requires a new level of sophistication. Internally, this means the development of integrated sales teams that can work with flexible goals to help customers cut costs while meeting their ongoing technological needs. Externally, it calls for skillful contract negotiation. Not only are pass-along increases a relic of the past, but customers now expect multi-year agreements that shield them from future price hikes. The overlap between customer expectation and sales goals is thus a moving - and narrower - target. As a result, contracts have been reborn into full-blown multifaceted agreements, with cost serving as only one element.

Exec compensation rising

Not surprisingly, the compensation structure for senior medical equipment sales executives is undergoing a significant transformation. The old commission-based system is out of synch with the shift of focus from product to cost and the need to emphasize relationship-building over quarterly billings. To be sure, performance still determines a significant slice of the pie, as well it should. But the commission incentive is now often placed atop a base salary, plus, increasingly, stock options, which are seen as a way of reinforcing the importance of long-term objectives. Typically, base salaries represent 60% to 70% of the total annual compensation package. Currently, we find those total packages to range from $120,000 to $150,000 for sales directors; from $130,000 to $200,000 for vice presidents; and from $170,000 up to $300,000 for senior VPs. And we expect the upward pressure on salaries to continue as companies compete for talent to fill these increasingly strategic positions.

in the past, the senior medical device sales executive was expected to fill two very different critical roles: both top salesman - focused on producing and closing the deal - and a corporate executive, with responsibility for creating synergies with his counterparts in R&D, marketing and regulatory affairs. In the new health care market environment, however, the need to develop synergies extends outward to the customer, bringing with it new, extremely attractive opportunities for those who can make the transition.

Michael T. Kelly, a former vice president at St. Paul, Minn.-based St. Jude Medical, is a managing director of Russell Reynolds Associates, a global executive recruiting firm. Kelly leads the firm's medical device practice from its Minneapolis office.

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